Fed's Williams Urges Rate Vow Tied to Economic Markers

The Federal Reserve should consider keeping keep interest rates low until unemployment falls "somewhat below" 7 percent, as long as inflation does not rise above 2.5 percent, the president of the San Francisco Fed, John Williams, said on Wednesday.

"It's very desirable to try to explain our policy in terms of thresholds," Williams told Reuters in an interview in his 12th-floor office overlooking San Francisco Bay.

Williams has long been a proponent of more clarity on Fed policy decisions, but this was the first time he offered his own view of the proper guideposts for monetary policy change.

The Fed last month unleashed a new round of monetary stimulus that kicks off with the purchase of $40 billion in new mortgage debt each month. The central bank has promised to continue to make purchases and do even more if the outlook for the labor market does not improve substantially.

While the Fed did not define what it meant by substantial improvement, minutes of its latest meeting released last week showed clear support for tying policy to specific economic conditions.

That would be a change from its current approach of picking a future date until which time it expects to keep rates low. The Fed currently says it expects to maintain ultra-low rates until at least mid-2015.

The president of the Chicago Federal Reserve Bank, Charles Evans, has been the central bank's most vocal champion of using specific economic markers for policy change. For the past year, Evans has called for the Fed to vow low rates until unemployment falls below 7 percent, or inflation threatens to breech 3 percent.

Last month Minneapolis Fed President Narayana Kocherlakota came up with different guideposts, preferring to pledge low rates until unemployment reaches 5.5 percent, as long as inflation does not look to top 2.25 percent.

Williams' own set of economic metrics for the central bank's low-interest-rate policy lies squarely between the Evans and Kocherlakota plans.

To Williams, a centrist, keeping rates low until unemployment falls to 5.5 percent would risk over-heating the economy.

He said that 7 percent unemployment as a threshold for policy change might be too high. Unemployment fell to 7.8 percent last month, after being stuck above 8 percent for more than four years.

"As long as inflation stays within half a percentage point of a 2 percent objective, I think you could argue for a lower unemployment rate," Williams said.

Arriving at numerical thresholds is "hard to do," he said, noting disagreement among policymakers about exact levels for the thresholds, and the difficulty of ensuring the public sees such markers as guideposts and not as hard-and-fast triggers for policy change.

Policymakers have been talking about such a plan since last year, he said, and the process is still ongoing. "I don't think this is an issue that requires action immediately," he said.

Williams took over the top job at the Fed's westernmost regional bank in March 2011, after his predecessor, Janet Yellen, moved to Washington to become vice chair of the Fed Board.

The Federal Reserve should consider keeping keep interest rates low until unemployment falls "somewhat below" 7 percent, as long as inflation does not rise above 2.5 percent, the president of the San Francisco Fed, John Williams, said on Wednesday.